Given the market volatility of the past few weeks, it’s important for investors not to lose their heads. Here are some guidelines for getting through crucial market moments:
- We’re just entering earnings season. This should reveal if companies’ earnings are slowing because of tariffs and higher input prices. No need to do anything until we see the impact of earnings on stock prices.
- U.S. midterm elections are coming up. If the Democrats win the House and/or the Senate, the market could sell off violently as Washington would return to partisan politics and create a deadlock on any future legislation being passed. Again, no need to do anything until then.
- From a technical standpoint, the markets still aren’t oversold yet so we don’t really see any screaming opportunities.
- In our estimation, the market top on the S&P 500 Index would be 3,700, which would be similar in valuation to the 1929 and 2000 peaks. Conversely, we’d only be interested in adding to our positions with any significance if the S&P 500 fell to 2,200 (20 per cent lower than today) where valuations make more sense. Remember, Wall Street pushes “adjusted earnings,” which are artificial as they don’t include interest on debt, taxes and depreciation.
- Holding cash makes more sense than ever. The maximum needed is 20 per cent. There’s no need to go over that amount because you’ll then have to find the market bottom (which nobody has ever been able to do).
- Avoid correlation risk in your portfolios. Owning similar stocks would have sent your portfolio down further than most, especially if you’re heavily tech-weighted.
- Avoid concentration risk. We hold 30 stocks in our portfolios with an average weight of 3 per cent. If one of them becomes a 6 per cent holding, we automatically sell half. This rebalancing helps protect the downside.
- You haven’t lost any money unless you sell.
- Time and compounding is how you make money. Two-thirds of all stock market performance in history has come from rising dividends and the re-investment of those dividends. If you want to retire wealthy, you have to let the dividends grow.
- If you wish to buy stocks in this market, we suggest you buy only half positions to start and sit back and watch what happens next.
In the end, there’s no reason to try to be a hero in these heady markets. Instead, discipline will carry the day.